There are many questions about the novel COVID-19 virus still being answered. Amid issues of general health and safety, many of our clients are facing tough decisions about their regularly held events, which are often essential parts of a nonprofit organization’s mission and services. Whether your organization puts on association member meetings, trade shows, educational conferences or other events where large groups meet, you may be facing difficult decisions about whether to hold the event and what consequences to expect if you cancel.
Cancellation Clauses: What happens if we cancel our event?
Most contracts provide for an orderly way of canceling them in the event circumstances change. However, because a hotel or resort relies on income scheduled from these events, there is usually a cost associated with cancellations. These costs will escalate as the event date gets closer and it becomes harder for the venue to replace your event with other paying customers. Escalating cancellation clauses provide for a stepped increase of costs, often described as liquidated damages that will be due upon cancellation. These increase at increments and vary from one contract to another. Another option within the contract may be a clause governing attrition rates for room revenue, space rentals, and food and beverage guaranteed minimum purchases. A good first step to getting a handle on the consequences of cancellation is to identify potential costs based on the liquidated damages or attrition percentages, keeping in mind any dates on which those damages and percentages increase.
Force Majeure: Can’t we avoid liability if the cancellation is for circumstances beyond our control?
It’s likely the contract also includes terms under which the contract can be canceled without incurring the liquidated damages or attrition percentage amounts. Often this is termed a force majeure clause, although some contracts provide for similar terms under sections addressing performance, frustration or impossibility of completing the contract bargain. The purpose is to allow the parties to exit a contract without penalty where the purpose of the contract has been thwarted by circumstances that were not foreseeable by either of the parties at the time the contract was made. The terms here are contract-specific, so it’s important to read them closely; the same COVID-19-caused cancellation may have different effects on whether you can cancel the contract without damages depending on how this clause is phrased. These are the key items to look for:
- Does the force majeure clause list circumstances that trigger it in an exhaustive way (it lists only those events to which it applies) or in a non-exhaustive way (it gives examples of what events would qualify but leaves room for other events)?
- In the case of COVID-19, is there a specific allowance for epidemic/pandemic events or public health emergencies?
- Is there an option for curtailment of transportation that might apply even if the specific location of the event is not placed off-limits by public health or local government officials? A widespread suspension of travel at the federal level or among significant private transportation carriers could have a similar effect.
- Does any non-performance clause require a certain level of attrition among your attendees in order to apply? Some hotel contracts require 30% to 50% of your attendees are unable to arrive at the location in order for force majeure circumstances to apply.
- What notice requirements are there to exercise this option? Many contracts request notice as soon as reasonably possible or within 10 days of the force majeure event. Successfully using this provision will mean making sure you comply with the notice requirements.
Insurance Options: How are we going to cover the losses from a cancellation?
For many conferences, conventions and trade shows, the best option is to have event cancellation insurance coverage in place. If you purchased this coverage, check the requirements of your coverage to ensure your event is covered for this purpose. And make sure to put your insurance carrier on notice as soon as it becomes clear the event will need to be canceled and comply with any requirements or limits.
If you do not have event cancellation insurance coverage in place, your general business liability insurance is the next place to turn. In a few cases, there is coverage for events beyond normal business operations, but these are not common. If your event is actually a regular part of your business operations, it is possible that coverage for business income loss would apply. However, that is the exception rather than the norm for most nonprofit organizations with annual events, and frequently, business income loss coverage is strictly tied to the geographic location of the regular business location of the company.
As a final fallback to limit damages and recover costs, you can also approach the venue to open a discussion of other options. A hotel, resort, or event space may be willing to come up with a way to work around the damages, such as by postponing the event, providing a future credit, or waiving some of the damages based on your relationship where there may be a history of events held by your organization at this location.
Factors Influencing Decisions: How can we decide when the situation is evolving daily?
As you consider whether to hold or cancel an event, the following list of questions may help you come to a decision that’s driven by facts and not fears.
How close to the dates of the event is it? If the event isn’t for three to six months, circumstances may have changed drastically by then. Consider whether you can wait a bit longer for more information or need to make a decision now.
- Does your venue (hotel, restaurant, resort, meeting center, etc.) have an escalating cancellation clause? If so, what are the key dates at which damages will increase? This may alter your thinking on the question above if you are leaning toward canceling.
- Where will the event be held? It’s unlikely that any area of the country will be entirely free of COVID-19 cases, but some regions will be more affected than others — either in the incidence of infection or in a locality’s ability to deal with the health crisis.
- Are your event sponsors (funding the event) and speakers (providing the substance) going to be able to attend the event? This is particularly important if their respective companies are restricting travel or if their own business (for example, medical staff) will need to divert its staffing resources to other areas.
- Are attendees actively canceling their participation, or are they looking to the event planners to make the decision before they respond?
- If you go forward with the event, what precautions will be taken at the event location, and are there others you should consider adding? Additionally, how can you best communicate this decision to your members?
- Can you use technology to continue the event in a modified form? For example, speakers who can’t travel could provide their talks by videoconference, attendees who have corporate travel restrictions can attend virtually, etc. This may not help with attrition costs for room revenue or food and beverage minimum guaranteed sales, but it would at least allow you and your members to have some of the benefits of the gathering.
- Do you have event cancellation insurance coverage to recoup costs? Is there any chance your business liability policy could cover some or all of the event under business income losses? While cost recovery takes a backseat to health and safety, knowing your potential loss and possible recovery may help when it is a close call.
We will continue to monitor the situation for our clients and advise on this and other legal issues related to COVID-19. While a special event is its own circumstance, we are also advising on employment practices, insurance coverage, and other workplace and business issues being created by the uncertainty surrounding this public health crisis.
ERISA excerpt from yesterday’s blog post, COVID-19 Checklist & Considerations for Private Fund Advisers:
- Non-ERISA Funds. Private funds that are structured to avoid being subject to the U.S. Employee Retirement Income Security Act of 1974 (ERISA) by reason of the significant participation/25% exception should carefully monitor to ensure that redemptions out of a fund do not result in “benefit plan investors” (i.e., ERISA plans, individual retirement accounts, and “plan assets” fund-of-funds, etc.) holding 25% or more of any equity class of the fund. For a description of the significant participation test, please see our recent client alert here.
- The fund sponsor/manager may have contractually committed to preventing the fund from holding “plan assets,” in which case it should refer to, and comply, with such commitments. Amendments to these terms will likely require consent of the ERISA plan, and even potentially governmental plan, investors.
- If redemptions inadvertently cause the fund to hold “plan assets,” the sponsor/manager may face significant obstacles in terms of ERISA compliance. For example, special care should be taken where the investment manager is newly formed, where a performance fee is paid to the investment manager, and/or where the investment manager enters into transactions with affiliates.
- ERISA Funds. Sponsors and managers of funds that are structured to operate as “plan assets” vehicles, and, therefore, comply with ERISA, will likely be relying upon the QPAM Exemption. The QPAM Exemption contains multiple technical conditions, some of which may be stressed in volatile times. For example, the QPAM Exemption would not cover transactions otherwise consummated by the investment manager on behalf of the fund if one or more investing plans of an employer (or affiliates of the employer) constitute more than 20% of the total client assets (e., inside and outside of the fund) managed by the investment manager at the time of the transaction. Investment managers that lose numerous, or particularly important, clients could potentially run afoul of this condition, which would mean they would have to rely on some alternative exemption, such as Section 408(b)(17) of ERISA, for its trading. Finally, in terms of significant volatility of pricing, investment managers operating ERISA “plan assets” funds should be careful about using their own valuation methodologies of fund holdings so as to avoid potential self-dealing concerns.
With COVID-19 concerns and market volatility, advisers should consider compliance challenges that are likely to arise. This COVID-19 Checklist & Considerations for Private Fund Advisers highlights key compliance issues, questions and considerations with respect to the COVID-19 outbreak and government response. Please note that if an adviser does not document its compliance efforts, the Securities and Exchange Commission (SEC) will assume that such efforts did not occur. This checklist is not exhaustive and does not, for example, cover Commodity Futures Trading Commission considerations, which are discussed in a separate client alert.
Nicole Kalajian – Counsel, Chicago
John Hamilton – Counsel, New York
Prufesh Modhera – Chair, Private Funds Group, Washington, DC
Sara Crovitz – Partner, Washington, DC
George Michael Gerstein – Co-Chair, Fiduciary Governance Group, Washington, DC
FINRA has published and plans to maintain a list of state “Shelter-in-Place” and “Stay-at-Home” Orders. The page also provides direct links to the Orders, themselves. A link to the page follows: https://www.finra.org/rules-guidance/key-topics/covid-19/shelter-in-place
- Electronic trading. Starting March 23, 2020, the New York Stock Exchange will temporarily close its trading floor and move fully to electronic trading. The facilities to be closed are the NYSE equities trading floor and NYSE American Options trading floor in New York, and the NYSE Arca Options trading floor in San Francisco. The CME Group temporarily closed its Chicago trading floor as of the close of business on March 13, 2020. Cboe temporarily moved to electronic trading effective on March 16, 2020.
- Restrictions on short selling. The Austrian Financial Market Authority (FMA) temporarily prohibited the short selling of certain financial instruments on the Vienna stock exchange until April 18, 2020. The ban includes creating or increasing net short positions via derivatives or other financial instruments which confer a financial advantage in the event of a decrease in the price of covered stocks. Short sales of equity indices or baskets are covered by the ban if the restricted securities account for 50% or more of their composition.
- Restrictions on trading. Australian Securities & Investments Commission (ASIC) has issued directions under the ASIC Market Integrity Rules to a number of large equity market participants, requiring those participants to limit the number of trades executed each day until further notice. These directions require those firms to reduce their number of executed trades by up to 25% from the levels executed on Friday.
- Restrictions on short selling. The Belgian regulator, the Financial Services and Markets Authority (FSMA), announced a ban on shorts for a basket of stocks during Tuesday’s (March 17, 2020) trade in order to avoid what it termed a “disorderly decline” in markets. The ban applies until April 17, 2020.
- Contingency measures. Direccion de Impuestos y Aduanas Nacionales (DIAN), the Colombian tax authority, has activated contingency measures due to the Covid-19 crisis allowing market traders to work from their homes. As a result, there may be delays in account opening, name change, and account closing requests while the contingency measures are in effect.
- Restrictions on short selling. The European Securities and Markets Authority (ESMA), on Tuesday, March 17, 2020 began forcing greater transparency of short positions by halving the threshold at which they must be disclosed. The revised rules are expected to be in place for a duration of three months.
- Restrictions on short selling. France’s Autorité des Marchés Financiers (AMF) banned short selling in 92 shares, those most impacted during Monday’s (March 16, 2020) sell-off, until the end of Tuesday’s (March 17, 20202) trading session. The AMF expanded that ban to cover all shares admitted to trading on French trading venues until the close of business on April 16, 2020. The ban prohibits creation or increase of net-short positions, meaning that all forms of shorting, including through derivatives and depositary receipts are covered.
- Restrictions on short selling. The ban covers shares admitted to trading on the Athens Stock Exchange until April 24, 2020. It prohibits creation or increase of net-short positions (including on an intra-day basis). Short-selling transactions via derivatives, depositary receipts and indices are covered by the ban.
- Restrictions on short selling. Sebi announced restrictions on
March 20, 2020 that halved position limits for certain stock futures, restricted short selling of index derivatives and raised margin rates for some shares in a bid to curb “abnormally high” volatility. The restrictions come in effect on March 23, 2020, and will continue for one month.
- Trading safeguards. The Indonesia Stock Exchange tightened its trading halt mechanisms to trigger a cessation of the main stock index more quickly effective March 11, 2020.
- Restrictions on short selling. Financial market authority Consob has prohibited short sales on 20 stocks for the trading session of March 17, 2020. Consob expanded the ban to cover a larger number of stocks and to continue until June 18, 2020, though restrictions could be lifted earlier according to market conditions. The ban prohibits creation or increase of net-short positions, including through derivatives and depositary receipts, except: (i) delta-neutral positions used to cover a long position in a convertible bond; or (ii) positions used to cover long positions in subscription rights. Net-short positions held through indices are covered if the restricted securities represent more than 20% of the index.
- Market closure. Jordan’s government suspended trading in the Amman Stock Exchange from Tuesday, March 17, 2020 until further notice.
- Market closure. Trading closed on March 12, 2020 and resumed on March 15, 2020 to address the fast-paced changes and turbulence facing the local exchange market, as well as regional and international exchanges, as a result of the Covid-19.
- Trading safeguards. The transfer of ownership, mandatory execution, off market trade, and over the counter (OTC) trading will all be postponed for a week. Boursa Kuwait also announced the reduction of price limits and security circuit breaker (CB) triggers, applying a 10% upper limit and CB trigger, and -5% lower limit and CB trigger.
- Restrictions on short selling. The Securities Commission Malaysia and the Bursa Malaysia Berhad announced March 23, 2020, that short selling will be temporarily suspended until April 30, 2020.
- Market closure. Philippine Stock Exchange closed Tuesday, March 17, 2020. Trading resumed on Thursday, March 19, 2020 with shortened trading hours. Trading of foreign exchange and bonds resumed on Wednesday, March 18, 2020.
- Trading safeguards. On March 21, 2020, the Philippine Stock Exchange announced that starting March 24, 2020, the lower static threshold of individual stock prices will be reduced from 50% to 30% from its previous closing price.
- Restrictions on short selling and trading safeguards. The Johannesburg Stock Exchange (“JSE”) decided against shortening trading hours, but its head said JSE would strictly enforce rules prohibiting uncovered, or naked short-selling and lengthen the mandatory halts to trading circuit breakers.
- Restrictions on short selling. South Korea’s financial regulator banned short selling in listed shares on the Kospi and Kosdaq starting on March 16, 2020 for six months.
- Restrictions on short selling. Comisión Nacional del Mercado de Valores (CNMV) has forbidden market players to build new net short positions in all Spanish shares or to increase existing ones for one month, effective March 17, 2020. This ban can be renewed for three-months periods if necessary. In addition to Spanish stocks, the ban also applies to index-linked products, spots, derivatives as well as over-the-counter transactions.
- Market closure. Colombo Stock Exchange closed Tuesday, March 17, 2020 and remained closed through March 19, 2020. The Government declared a holiday asking all non-essential businesses not to operate on March 17-19, 2020. Trading resumed on March 20, 2020, but then was suspended again at noon local time the same day in view of the curfew imposed by the government to allow staff to travel to their homes.
- On March 22, 2020, the Colombo Stock Exchange announced that the market would be closed on March 23 and 24, 2020, as those days have been declared market holidays. On March 24, 2020, the Colombo Stock Exchange announced that the market would remain closed until March 27, 2020.
- Restrictions on short selling. The Financial Supervisory Commission announced a short selling ban on the Taiwan Stock Exchange and the Taipei Exchange starting March 20, 2020. The ban applies to stocks that showed a decline of 3.5% or more a day earlier.
- Restrictions on short selling and trading safeguards. The Stock Exchange of Thailand (“SET”) restricted short selling to trade only the price higher than the last trading price (uptick) effective since the afternoon trading session of March 13, 2020. Additionally, the SET announced further tightening of trading measures by adjusting ceiling and floor criteria and circuit breaker rules, effective from March 18, 2020, which are set to extend no further than June 30, 2020.
- Restrictions on short selling and trading safeguards. Restrictions on short selling were initially imposed in February 2020 following an airstrike. As a result of current market conditions, the bans on short selling will be kept in force until further notice. Additionally, circuit breakers were tightened effective March 13, 2020 in the equities and derivatives market.
- Trading safeguards. Effective March 18, 2020 until further notice, a limit of 5% will apply to all securities trading on Nasdaq Dubai markets.
- Restrictions on short selling. The U.K.’s Financial Conduct Authority (FCA) also issued a temporary ban on the shorting of 37 Belgian and Italian stocks following moves from respective regulators in both countries. The ban was effective March 17, 2020 until the end of the day March 17, 2020.